Earlier this week I tabbed lululemon athletica (Nasdaq: LULU) to join my Rising Star Portfolio. In that report, I touched on some of the risk factors involved with owning this yoga-inspired retailer which refuses to use proper capitalization.

Today I want to introduce you to a different way to measure risk -- a method devised by David Gardner and his Motley Fool Rule Breakers team. It's fairly simple: Just run your company through the following 25 questions and add up all the "no" answers.

THE COMPANY (5 questions)
1. Profitable: Is the company profitable over both the past quarter and past 12 months?
Yes.

2. Flow: Is the company cash-flow positive over both the past quarter and past 12 months?
Yes.

3. Brand: Does the company's business rely on recognizable branding truly valued by its buyer base?
Yes.

4. Diversified: Has the company diversified its buyer base such that no single customer accounts for more than 20% of revenue?
Yes.

5. Raving Fans: Does the company receive, on the whole, positive word of mouth from its customers?
Yes.

FINANCIALS (5 questions)
6. Growth: Is the company growing its sales by between 10%-40% annually over the previous three years?
No. 42% annually.

7. Independence: Can the company operate its business over the next three years without relying on external funding
Yes.

8. Disclosure: Does the company report to a high standard of disclosure, consistent with SEC guidelines in the U.S.?
Yes.

9. Transparency: Would an intermediate-level investor find the company's financial statements and management ownership disclosures relatively easy to sift through and understand?
Yes.

10. Well-Managed: Over the most recent fiscal year, did the company report a return on equity of 15% or higher?
Yes.

THE COMPETITION (3 questions)
11. Underdog: Is the company free of any direct competitors possessing substantially (2x+) greater financial resources
No. Of particular concern here are Nike (NYSE: NKE), Under Armour (NYSE: UA), and Adidas. If you read my last article, however, you'll see that I'm quite happy how well lululemon stacks up against these guys.

12. Goliath: Is the company free of any disruptive upstarts visibly challenging its business model?
Yes. None that I can see at this time.

13. Moat: Would potential new competitors face high economic, technological, or regulatory barriers to entry?
No. I think lululemon's brand and grass-roots fan base give it a bit of a moat, but a Nike or Under Armour would have no problems attacking it directly.

THE STOCK (3 questions)
14. Market Cap: Does the stock have a market cap of greater than $500 million?
Yes.

15. Beta: Is this stock's beta rating over the past 12 months less than 1.3?
No. 2.65.

16. P/E Ratio: Does the stock have a positive price to earnings multiple that is below 30?
No. 55.

PEOPLE (2 questions)
17. Founder: Do any of the founders or founding family still have at least a 5% stake in the company?
Yes. Founder and Chairman Dennis Wilson, 32%.

18. Experience: Of the top three officers, do they have more than 15 years of combined leadership at the company
Yes.

SERVICE-SPECIFIC (2 questions) ... here, Rule Breakers
19. Rule Breaker: Does this company meet a majority of our Rule Breaker attributes?
Yes. I'll give it 4 out of 6.

20. Binary Destiny: Are the company's future business prospects easily able to withstand the shock of binary outcomes that go against it?
No. Though unlikely, I guess it's possible the business could get beaten into irrelevancy by a bad economy and fickle faddish consumers.

FOOLISHNESS (5 questions)
21. Immaculate? Is this company certain to be fault-free and fraud-free in all its corporate statements and deeds?
No. This answer is always "no."

22. You: Do I want to know more about this company; am I willing to dig deeper, learn more, ask questions on the boards -- actively understand this company?
Yes.

23. Company question No. 1: Ask and answer the most insightful question you can come up with when assessing this specific company's risk.
Is management capable of steering the company through the fickle world of fashion retail?
Yes. This seems to be an experienced bunch with skin in the game.

24. Company question No. 2: Ask and answer the second most insightful question you can come up with when assessing this specific company's risk.
Are there acceptable odds that we'll avoid a near-term economic climate that discourages paying $48 for a crewneck tee?
Yes. We can only guess at the odds of another crash, and that risk is certainly there. But for me, after balancing the risk and the potential reward, I'm answering "yes."

25. Bulletproof? Can you be certain that this company is invulnerable to external world or macroeconomic events such that you're sure you can get all your capital back?
No.

I count eight "no" responses, giving this stock moderately low risk on the Rule Breakers scale:

Rule Breakers Risk Ratings Scale
High (20-25 points)
Moderately High (15-19 points)
Moderate (10-14 points)
Moderately Low (5-9 points)
Low (0-4 points)

You should try this exercise with every company you own; it makes you think about things from different angles. I promise you'll come away with a greater understanding of the business and its future prospects!

Fool analyst Rex Moore has a personal charm rating of 15: moderately high. He owns no companies mentioned here. lululemon athletica and Under Armour are Motley Fool Rule Breakers selections. Nike is a Motley Fool Stock Advisor recommendation. Under Armour is a Motley Fool Hidden Gems pick. Adidas is a Global Gains selection. The Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.